Since the early days of e-commerce, payment processing from Brazil to abroad has been a problematic topic. Theoretically, merchants should only need to connect to one payment gateway to sell their goods and services anywhere in the world. Unfortunately, the reality is not as simple and for many countries including Brazil, it is not enough to be connected with only a couple of credit card networks in order to process e-commerce payments.
Although the global e-commerce industry is driven by credit card payments, for a large portion of the world, credit cards are still considered both expensive and insecure.
Addressable Market in Brazil
Looking at the entire Brazilian market for e-commerce, an international merchant that is using international payment processing of credit cards might be able to reach only 20 to 25% of the potential Brazilian market.
The two limiting factors are:
- Access to credit cards that accept international transactions among Brazilian consumers
- Higher rate of false fraud alerts of international payment gateways for consumers from Brazil
Although the market reach is limited to 20 to 25%, it is likely that you are still able to reach at least 50% of your addressable market with international credit card processing.
The density of credit cards that accept international transactions is higher in the more affluent social classes with more disposable income.
There are about 80 million active Brazilian credit cards in the Visa and MasterCard networks. However, the number of consumers a merchant can reach only by credit card is much lower. A portion of the 80 million cards are not authorised for international transactions, and many consumers have multiple credit cards issued.
Tax on International Payments from Brazil
Brazil has a financial transaction tax that is collected on the top of any international payment transaction performed using a Brazilian credit card.
This tax is known as IOF, and is collected by the credit card issuer. The current rate is 6,38% and applies to both individuals and companies. As the tax is collected by the credit card issuer there is no way for Brazilian consumers to avoid paying this tax and the IOF is not refundable for Brazilian companies.
The Brazilian currency Real is considered to be a restricted currency, which implies limitation to the tradability of this currency. Payments in Brazilian Reais cannot be sent outside of Brazil and international payment processors can therefore not legally collect payment from Brazil from abroad using the Brazilian currency. As a merchant, you can display an approximate price in the Brazilian currency using real time currency exchange information but the merchant cannot process the payment transaction using Reais.
False Fraud Detection
Brazil is one of the countries with the highest rates of fraudulent e-commerce activity in the world. As a result, international fraud prevention services are likely to score transactions from Brazil with a higher risk score than transactions from other countries.
The problem is twofold; combining the very real fraud problem in Brazil with that very few Brazilian consumers ever engaged in international e-commerce transactions results in insufficient data, and insights for international fraud prevention services to accurately score Brazilian transactions. When the fraud prevention services choose to be cautious, there is a large amount of incorrectly rejected credit card transactions and subsequently lost revenue for the merchant.
International Merchants and Brazilian Acquirers
The most effective way for an international merchant to collect payments from Brazil is to setup a dedicated payment infrastructure targeting the Brazilian market.
Due to the current financial regulations in Brazil, international merchants are required to establish a legal entity in Brazil in order to enter a merchant agreement with Brazilian acquirers.
Having a correctly structured legal entity in Brazil can be beneficial beyond improved payment collection. There is also potential for substantial tax savings, especially for service companies. Brazil has a reputation for being a high tax country, however for service companies, Brazil has lower sales taxes and corporate taxes than most countries in Europe and North-America.
Before initialising the process of establishing a legal entity in Brazil it is important to assess the increased sales volume that can be achieved by enabling local payment processing. Unfortunately the Brazilian bureaucracy results in considerable costs of maintaining a legal entity in Brazil. For service companies the break-even point is usually around USD 100.000 per month in increased revenue while for merchants that are selling goods, the break-even point will be significantly higher.
Establishing local payment processing in Brazil will enable a significant number of additional payment methods beyond credit cards.
We have written in great detail about boleto bancário in other articles. The popularity of boleto bancário among consumers is slowly declining but it is still an important payment method as a fallback solution.
The use case for boleto bancário in e-commerce are usually related to one of the following three scenarios:
- The merchant would like to establish a process for the least possible friction in order for a consumer to complete the purchase. A boleto bancário is often used when the payment gateway is rejecting the consumers preferred payment method or when the customer has abandoned a shopping cart before completing the checkout
- The consumer is not the one that is actually going to pay for the purchase. This can be either in the case where the goods or service are going to be paid by a financial department within a company or another third party
- The consumer does not want their payment to be traced. Many Brazilians have income that is not reported and wish to use the money in a way that is not easy to trace. While the banks will report every single payment transaction to the federal tax authorities, boleto bancário can be paid anonymously by cash in banks and most supermarkets
Debit cards are the fastest growing payment method for e-commerce in Brazil. In volume, there are still less debit card than credit card transactions related to e-commerce in Brazil, but with more than 300 million debit cards issued in Brazil, the payment method is quickly becoming ubiquitous in Brazil.
Beside there being more debit cards than credit cards issued in Brazil, it is often also an easier and more streamlined way to complete e-commerce transactions.
Many Brazilian consumers have been subject to fraudulent employees of the merchants abusing access to credit card information. This concern is addressed with debit cards since all debit cards in Brazil enforces the use of 3D secure when used for e-commerce transactions. Use of 3D secure both circumvent the guessing game related to fraud detection services as well as creating an additional level of confidence for the consumer.
National Credit Cards
An increasing amount of credit cards are being issued on the Brazil network Elo and Hipercard. These networks are used as standard by several of the larger Brazilian banks and consumers will sometimes be charged extra for credit cards issued on the Visa or MasterCard networks.
Although Visa or MasterCard are the market leaders, Elo and Hipercard have a much larger number of active credit cards than international networks like American Express and Diners Club.
Brazilian Payment Service Providers with International Payout
There are a handful of Brazilian payment service providers that offer structure to collect payments in Brazil and clear the payments out of Brazil to international merchants.
Their services are setup so that for the Brazilian consumer the payment service provider will appear as the merchant and the transaction is charged in the local Brazilian currency, Real.
Depending on the payment method, the Brazilian acquirer will make the payout to the Brazilian payment service provider within 30 days after the transaction was authorised. The payment service provider will then deduct the Brazilian processing fees as well as the required withholding tax before the payment is exchanged to an international currency and transferred to the merchant abroad.
About 17% of Brazilian credit card transactions are done in installments. Most commonly this is used to purchase capital goods using interest free installments on the credit card. On the back-end, the acquirer will also be paying the merchant in installments30 days after the installment was charged to the consumer. If a merchant wishes to offer payment in 12 installments, for example, the merchant will only receive the final payment 13 months after the product was sold.
A significant portion of the revenue of the Brazilian acquirer comes from merchants that wish to anticipate payout for sales completed with installments. The acquirer will anticipate payouts and charge the merchant with the related interest.
For international merchants that want to offer installments for the customers while using a Brazilian payment service provider with international payout, all installments will have to be anticipated before the transaction is cleared out of Brazil.